1. 317_L19, Feb 26, 2008, J. Schaafsma 1 Review of the Last Lecture Began our discussion of the second source of market failure in the Healthcare sector => externalities Discussed the basic theory of positive externalities in consumption and how that leads to inefficient output from society’s perspective new efficiency condition: MSB = MSC, in the absence of any externalities this reduces to PMB = PMC, subsidy = EMB needed began our discussion of the nature of the externality in the consumption of healthcare ruled out fear of contagion as the source of the externality Altruism is the source of the externality, but can identify four versions, which one applies??

2. 317_L19, Feb 26, 2008, J. Schaafsma 2 Two Possible Reasons for the Externality in HC Consumption. two possible reasons for the externality from HC consumption: 1. Selfishness 2. Altruism i) Utility specific altruism ii) HS specific altruism iii) HC need specific altruism a) self-expressed HC need b) paternalistic (third-party assessed HC need)

3. 317_L19, Feb 26, 2008, J. Schaafsma 3 The Basic Source of the Externality in HC Consumption: HC is a need. HC often described as a “need” not a”want” want (is a subjective concept)  determined by income, prices and tastes; no ethical imperative that others should help a person satisfy his/her wants HC need  relays 2 messages: 1. Objective, not subjective  HC requirement can be objectively verified by a qualified third party (three parties: patient, taxpayer, HC provider), i.e., HS  if HC consumed 2. Ethical imperative  need imposes a moral obligation on others to supply the technically required HC, Health is a basic human right ///

4. 317_L19, Feb 26, 2008, J. Schaafsma 4 Altruistic Externalities: Utility Specific (all needs create an externality, poor HS is a need) A’s level of satisfaction depends in part on B’s level of satisfaction  if B better off for whatever reason, then A better off, cet. par. interdependent utility functions where U B affects U A : U A = U[X 1, … X n, HC A, HS A (HC A ); U B ] EXPLAIN Inadequate explanation of the externality: if correct  subsidize B whenever U B drops, generally don’t  should transfer wealth to B, let B max U, we don’t! ///

5. 317_L19, Feb 26, 2008, J. Schaafsma 5 Altruistic Externalities: HS Specific (there is an externality only of the  in utility is due to a  in HS) if the externality isn’t from U B affecting U A, when U B changes for whatever reason, perhaps it derives from changes in U B due to changes in HS B only. U A = U[X 1, … X n, HC A, HS A (HC A ); U B (HS B )] EXPLAIN not the reason for the externality  we don’t necessarily act if U B  due to HS B . If HS B  and there is no HC to address it we don’t transfer wealth to compensate for the loss of utility ///

6. 317_L19, Feb 26, 2008, J. Schaafsma 6 Altruistic Externalities: self- expressed HC Specific is the externality driven by a person’s self expressed HC needs? person is ill, and we feel good if that person can access the HC the person feels is required. NOT QUITE the source of the externality  we are not willing to pay for whatever HC B feels might help improve his/her HS we only feel obligated to B if we (society) believe the HC will make a demonstrable difference to B’s HS. ///

7. 317_L19, Feb 26, 2008, J. Schaafsma 7 Altruistic Externalities: HC Specific but Paternalistic source of the externality in HC  society believes that there is HC that will make a difference to a person’s HS and feels good if the person can access it. only feel obligated to help person access HC we believe will make a difference  altruism based on paternalistic assessment of HC needs. approved HC a merit good Merit good: a private good that society feels should be accessible to all  lack of income should not be a barrier to HC consumption. ///

8. 317_L19, Feb 26, 2008, J. Schaafsma 8 Implications of the Ethical Imperative in the Concept of HC Needs ethical imperative based on third party verification of HC needs  we must reduce barriers to HC capacity barriers  hospitals, HC, personnel, equipment geographical barriers  HC to be available in all parts of Canada social barriers  HC available regardless of social class, race etc. financial barriers: - subsidies to production - publicly funded insurance - community rated insurance - subsidized health insurance premiums ///

9. 317_L19, Feb 26, 2008, J. Schaafsma 9 Technological Progress and Externalities in HC Consumption with technological developments  externalities in HC consumption increasing today  many more effective treatments available than even only 20 years ago  externalities are increasing. technological progress in HC creates funding issues  what should society pay for? Is it acceptable to limit HC to cost-effective treatments or should HC be provided regardless of cost as long as it makes some difference to HS? ///

10. 317_L19, Feb 26, 2008, J. Schaafsma 10 Other Sources of Externalities in the HC Sector: Alcohol lifestyle choices can impose costs on others, partly through community rated, or fully subsidized, health insurance, and partly thru increased non-HC costs e.g., excessive alcohol consumption creates direct healthcare costs for society from adverse health effects from excessive alcohol consumption. also additional costs:  accidents  (more healthcare costs  & property damage  )  fetal alcohol syndrome (HC costs , social services costs  )  spousal/child abuse ///

11. 317_L19, Feb 26, 2008, J. Schaafsma 11 Other Externalities in the HC Sector: Smoking has been argued that smoking creates –ve externality  i) higher costs for medicare to treat the ill health of smokers ii) second hand smoke causes illness, higher health care costs, fire damage. Thus tax cigarettes however  also a +ve externality from smokers  e.g., they pay the same CPP premiums but on average collect for a shorter period of time  smokers as a group subsidize retirement benefits of non- smokers. ///

12. 317_L19, Feb 26, 2008, J. Schaafsma 12 Other Externalities in the HC Sector: Consumption of Fat excessive consumption of fat  bad for HS  HC costs  for all through higher health insurance premiums and/or taxes to pay for HC some have argued  levy a tax on consumption of fat  use revenue to finance HC to the extent excessive fat consumption declines  better HS regressive tax; but would place more of the HC costs on those who create them through poor lifestyle choices. /// TONER, Melanie, "Obesity: Is Taxing Fat the Best Medicine?" (April, 2005) see